The following post comes to us from Vinh Nguyen and Anh Tran
both of the School of Public and Environmental Affairs at Indiana University Bloomington, and Richard Zeckhauser
, Professor of Political Economy at Harvard University.
In our paper, Insider Trading and Stock Splits, which was recently made publicly available on SSRN, we examine whether stock splits create value to shareholders. Inside traders capitalize on their edge in information. Typically, they buy before good news is released or sell before bad. Insiders have an even greater advantage if they can create news that moves a stock, even when no real news is available. There is strong evidence that this is precisely the strategy that inside traders in Vietnam have employed in recent years. They have purchased stock, and then announced stock splits. As is common in stock markets, these stock splits led to price rises, likely with help from manipulation. Quite suspiciously, all excess returns from split announcements had vanished in 240 trading days. This provides strong evidence that the splits were employed to create a bubble, rather than serving as value-creating corporate events.
Some special features of the Vietnam market, presumably found in markets of other countries that have weak enforcement practices, help to explain its vulnerability to such manipulation. First, in Vietnam, the State Securities Commission (SSC), the government’s agency enforcing the securities laws and regulating the securities industry, imposes strict restrictions and reporting requirements on the trading activity. However, these requirements are not followed and violations are punished, if at all, rarely and lightly. During the eleven-year history of Vietnam’s stock market, only one illegal insider trading case has been criminally prosecuted. Violators in other cases have paid a minimal fine, usually less than 10% of the illegal trading profits. Clearly, inside trading is a profitable activity. Second, Vietnam has many companies that are vulnerable to manipulation because they have substantial state ownership and low capitalizations, and thus few outside shareholders to arbitrage prices into line. (Limited participation by major investment firms in these types of companies and prohibitions on short sales inhibit arbitrage by others.) Management in state-owned firms often represents the state ownership in board of director and investor meetings. However, the government has no effective mechanism to supervise its representatives. Thus management in such firms has significant control power but a small share interest. Managements thus often elect to reward themselves through share trading rather than through creating value for the firms.
…continue reading: Insider Trading and Stock Splits